Money And Credit

Define the Barter System. 

   The exchange of 'Goods and Services' or commodities with each other is called the Barter System. 

What are the problems faced by the people before the use of money for transactions? 

1. Under the Barter System, it was necessary for a person who wanted to sell goods only to those who wished to buy them. 

2. It was hard to carry goods from one place to another place in search of buyers. 

3. Money provides the crucial intermediate step and eliminates the need for a double coincidence of wants. It also serves as a medium of exchange.

What are demand deposits? How is money safe with the bank? 

1. The deposits in the bank accounts can be withdrawn on demand and are called demand deposits. 

2. People deposit their surplus cash at the beginning of a month with the bank where they have an account in their names. 

3. Banks accept these deposits and also pay an amount as interest. 

4. In this way, people's money is safe with the banks and it also earns certain interest. 

How do the deposits with the banks become their source of income?
(or)
How do banks mediate between those who have surplus money and those who need money? 

1. Banks use major portions of the deposits to extend loans. 

2. As there is a huge demand for loans for various economic activities, the banks make use of the deposits with them to meet the loan requirements. 

3. In this way, banks mediate between the depositors and the borrowers. 

4. The banks charge higher rates of interest on the loans than what they pay to the depositors. 

5. The difference between the interest rate charged from the borrowers and the interest rate paid to the depositors in the sources of income for the banks. 

Given that a large number of people in our country are poor. Does it, in any way, affect their capacity to borrowers? 

1. Credit is always given after properly assessing the repayment capacity of the borrower, since the poor people do not have repayment capacity, they are unable to get loans, especially from formal sectors. 

2. They get some loans from the informal sectors, but in that case, they often fall into the debt trap because of high-interest rates. 

Why should credit at reasonable rates be available for all? 

1. Credit is an important aspect of economic activity. 

2. Right from small farmers to big business tycoons, everyone needs to borrow at some time to improve productivity. 

3. In case of unreasonable rates, the borrower always runs the risk of falling into the debt trap which is not good for the society and the economy as a whole. 

Hence, reasonable rates are important for all. 

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